L-Day: Cultural tax reliefs – Key technical and administrative changes

Following the publication of the responses to the consultation on audio-visual (film, TV and video games) tax relief reform in March 2023, the long-awaited draft legislation has now been published. The detail is largely as expected by the sector, but there are one or two areas where, arguably, the Government could have gone further in simplifying the reliefs. It has also been announced that there will be the introduction of a mandatory online information form.

As expected, the draft legislation confirmed thatopens in a new tab, with effect from 1 January 2024, film, TV and video games production companies can elect to claim expenditure credits on eligible productions rather than an adjustment to the company’s taxable profit as under the existing regimes. 

Two expenditure credit regimes will be introduced:

• Audio-Visual Expenditure Credit (AVEC) – to cover the four existing film and TV tax reliefs; and
• Video Games Expenditure Credit (VGEC).

As previously announced, companies will be entitled to an expenditure credit of either 34 percent (video games, film and high-end TV) or 39 percent (animation and children’s TV) of the company’s qualifying expenditure. Qualifying expenditure will be restricted to 80 percent of the total core expenditure (or the UK expenditure, if lower) with the mechanism largely mirroring the existing Research & Development Expenditure Credit (RDEC) regime.

Broadly, the expenditure credit can be used to discharge any tax liability of the company, or can be paid to the company (or another group member) subject to certain steps.

Perhaps surprisingly, there will still be a requirement to treat each qualifying production as a separate trade for tax purposes (and even more surprisingly) with companies continuing to calculate the profit/loss of each trade in broadly the same way as currently – an area where, perhaps, the chance to further simplify the regime has been missed. 

The current tax reliefs will close to new productions from 1 April 2025. Films and TV programmes that have not concluded principal photography, and video games that have not concluded development by 1 April 2025, may continue to claim relief under the current regime until 31 March 2027 or will be able to opt into the new regime.

The new regimes introduce an exclusion of expenditure that represents ‘connected party profit’ (albeit for AVEC there is an exception for costs incurred for renting, hiring or otherwise securing the use of premises or land as a location for principal photography). Therefore, any group recharges will be restricted to the actual underlying costs incurred by the group (although this is not being introduced to the existing regimes). This could have a significant impact on certain special purpose vehicle (SPV) structures which are common across the sector.

An online information form will be implemented alongside the introduction of the new expenditure credit regimes with the intention to streamline administration and help tackle abuse of the reliefs. Further guidance on this will be available later in the year.

• A reduction in the minimum slot length for a high-end TV production to be eligible for AVEC from 30 to 20 minutes;
• For VGEC (bringing it into line with existing TV and film reliefs), only expenditure on goods or services that are ‘used or consumed’ in the UK will qualify. This rule focusses on the location of the recipient as the means of determining UK qualifying expenditure (i.e. not where goods or services may be sourced from); and
• Restriction of claims if the company is no longer a going concern, subject to certain conditions.

From 1 January 2024, companies should consider whether an election into the new regime will be beneficial. The slightly higher credit rates may be attractive, but, where relevant, the connected party profit rule, restriction to UK expenditure for VGEC and further administrative requirements could detract from this. For those companies in scope, the interaction with BEPS Pillar Two rules in the UK and globally should also be considered.

For further information please contact:

• Peter Chapman
• Daniel O’Toole